the digital assets used as a medium of financial exchange, are rapidly emerging from high tech obscurity and becoming mainstream.
These currencies continue to proliferate, and last year all cryptocurrencies combined had a market capitalization of over $13 billion.
Cryptocurrencies are therefore an enduring part of the financial landscape; they aren’t going anywhere. Businesses, especially small businesses, which embrace these new financial instruments therefore stand to possess a competitive advantage over their rivals.
Here are three things for your small business to think about as our financial transactions are increasingly paperless, and we rely on a wider variety of financial instruments to enable purchases, sales, and contracts for real property.
Similarities and Differences
There are hundreds of cryptocurrencies available for financial transactions, although the top dozen or so account for the majority of market capitalization.
All cryptocurrencies are paperless, and exist entirely within the digital realm. Interestingly, the popular cryptocurrency Bitcoin, in a nod to mainstream currencies, does offer an ATM service. However, the “coins” dispensed from these machines are merely physical representations of the underlying digital asset. Cryptocurrencies rely on their namesake cryptographic techniques to ensure that each payment, and the payment system itself, is secure.
Bitcoin, for example, utilizes a cryptographic system commonly called blockchain, which essentially timestamps each digital transaction successively for systemic verification. The enhanced security of cryptocurrency allows it to function as a peer-to-peer financial transaction enabler, without the intermediaries (central banks, treasuries, exchanges, etc.) most other financial instruments require.
Despite the common foundations for these digital financial instruments, there are marked differences in the various types of cryptocurrencies available today. To start with, some cryptocurrencies limit the total number of digital “coins” that can exist within the system; these are commonly called deflationary currencies.
Inflationary cryptocurrencies, on the other hand, allow for additional monies to be added to the system. Bitcoin is an example of the former, while the cryptocurrency Ripple is an example of the latter.
There are pro and con arguments for these two types of cryptocurrencies, so understanding them both is a critical first step for any small business that is going to start using them.